Market segmentation on the Johannesburg Stock Exchange

This study finds that the JSE Actuaries All Gold and Industrial Indices may be employed as observable proxies for the first two factor analytically extracted factors on the Johannesburg Stock Exchange. It is found that a two factor model specified in this manner provides a more comprehensive explanation of the return generating process operational on the JSE than the traditional single index market model of Markowitz and Sharpe and avoids many of the well documented difficulties associated with the factor analysis methodology. Both models are found to underlie pricing relationships within the framework of the APT. Examining the two factor model, it is found that the pricing restrictions implied by the APT cannot be rejected while those implied by the capital asset pricing model appeared to be distinctly violated when employing the All Share Index as the single market proxy.